National Association of Home Builders Discusses Economics and Housing Policy

Eye on the Economy: Home Building on the Rise in 2014

The prospects for home building in 2014 are bright. NAHB is forecasting a nearly 25% gain in total housing starts, with a 32% pickup in single-family construction. And the coming year will come atop the gains of 2013. NAHB expects that the final numbers will show that housing starts expanded almost 18% last year to a total of 921,000.

November housing starts data from the Census and the Department of Housing and Development show an uptick after weakness in home construction during the fall. Total housing starts topped an annualized pace of one million, the first time since 2008. Single-family starts rose to 727,000, a 20.8% increase over October and the highest since December 2007. Multifamily starts rose to 364,000, a 26.8% increase over October.

Consistent with these data, builder confidence grew at the end of 2013. The December NAHB/Wells Fargo Housing Market Index rose four points to 58 as builders recovered from hesitancies in October and November. The increase puts the index back up to the peak it reached in August before the rise in mortgage rates and the uncertainty caused by the debt and deficit debate cooled confidence. The December index is 37 points above the December 2011 level. All three of the components also showed significant increases, with current sales rising 6 points to 64, the highest since December 2005. Expected sales increased 2 points to 62 and traffic increased 3 points to 44.

The Census also reported new home sales were steady in November, declining a statistically insignificant 2.1% from an unusually high October. The average for the first two months of the fourth quarter is the highest since mid-2008. The previous three months were also revised upward by a total of 88,000 sales. New home inventories dipped to 167,000, representing a 4.3 months’ supply and the lowest months’ supply level since the first quarter of 2013.

Prospects are positive for multifamily development going forward. NAHB expects more than 8% growth for multifamily starts in 2014, and recent data support this forecast. As reported by the Survey of Market Absorption of Apartments, three-month absorption rates for rental (71%) and for-sale (84%) multifamily units increased for third-quarter dispositions of units completed during the second quarter. Both rates represent post-recession highs, indicative of healthy demand for multifamily housing. November CPI data indicate that real housing rents have increased by 1% over the past year.

While existing homes sales, as reported by the National Association of Realtors, were down 4.3% in November, pending home sales increased for the month, as home buyers adjusted to a new interest rate environment and consumer confidence improved. In fact, survey data revealed a significant bounce back for consumer confidence in December, following the political drama in Washington that surrounded the partial government shutdown. Higher home prices helped, with the Federal Housing Finance Agency reporting slights gains for prices in October, although the recent run-up in prices has hurt affordability among first-time buyers, who now make up only 28% of existing home buyers.

Underlying these positive developments for housing is an economy that continues to grow, albeit never in the high gear that is typically seen after a recession. Gross Domestic Product grew 4.1% for the third quarter, higher than initial estimates and an improvement of growth rates of 2.5% and 1.1% for the second and first quarters respectively. However, while part of the upward revisions for the third quarter was attributable to consumer purchases, another portion was allocable to increases in inventories, which can foreshadow paybacks against growth in future quarters. Nonetheless, the recent data are positive for the economy overall.

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